How to refinance an FHA loan to a conventional loan

If you're a homeowner with an FHA loan, you might be considering refinancing from a Federal Housing Administration (FHA) loan to a conventional home loan. After all, there are valuable financial benefits, like lowering your monthly payments and reducing your interest rate, which can put money back into your pocket.

But what’s the difference between the two loans, and is a refinance from an FHA loan to a conventional one the best choice for you?

Can you refinance an FHA loan to a conventional loan?

Yes, if you have an FHA loan, you can certainly refinance to a conventional one. In fact, refinancing from an FHA loan to a conventional loan may shorten your loan term, take advantage of lower interest rates, and enjoy lower monthly payments.

Why refinance from an FHA mortgage to a conventional loan?

The differences between FHA and conventional loans often make the FHA loan a better option for borrowers purchasing their first homes. That said, there's no one-size-fits-all answer. It largely depends on your needs, preferences and situation.

FHA loans are backed by the government. In turn, they typically have more relaxed requirements — like lower credit score prerequisites. However, many homeowners opt to refinance FHA to conventional once they have the loan.

There's good reason for that. They might be able to get rid of their mortgage insurance premium (MIP), bump down their monthly payment or tap into their home equity to fund other expenses. If the markets have changed, you might qualify for a lower rate on your mortgage loan when you switch, too.

How soon can you refinance an FHA loan?

You can refinance an FHA loan after you've made at least six consecutive monthly payments on it. In other words, 210 days past your closing day. This is otherwise known as the 210-day rule. For example, let's say you closed your mortgage on February 20. You'll be eligible to refinance your FHA loan after September 21, which is after the 210-day mark.

Besides making at least six consecutive monthly payments on your mortgage and waiting until at least 210 days after your closing date, to qualify for a refinance, your home must be your primary residence. Plus, you'll need to be current on your payments. You can't miss more than one late payment in the last 6 months.

Eligibility requirements for refinancing an FHA loan

The specifics of the requirements to refinance an FHA loan depend on the loan type, but broadly speaking, you'll need to meet the following criteria:

• Have an existing FHA loan.
• Be current on your payments. You'll also need to meet any payment requirements (meaning you cannot have been late more than once in the last 6 months).
• Meet the lender's loan requirements, such as a minimum credit score, debt-to-income (DTI) ratio, income and asset requirements.

Types of FHA refinancing options and their eligibility

The good news is that you have several options for an FHA mortgage refinance. They each have their own requirements and eligibility. Let's take a look:

FHA streamline refinance

An FHA streamline refinance is offered through the Federal Housing Administration (FHA) to those with an existing FHA loan to either bump down their monthly payment or lower their interest rate. This option allows you to switch your loan type from an adjustable-rate mortgage (ARM) to a fixed-rate one, which can make for predictable payments.

There are two main forms of an FHA streamline refinance. The first doesn't require a credit and income verification check, which may speed up the application and approval process.

The second option does require a credit check. The lender will need to verify your income and check your debt-to-income ratio (DTI). If you need to remove a borrower from your mortgage, your refinance will fall under this category.

FHA cash-out refinance

A cash-out refinance is when you refinance your mortgage for a larger amount than what you owe on your existing mortgage, and pocket the difference. For example, let's say you took out a mortgage for $250,000 and you do a cash-out refinance with a new mortgage of $300,000. Your closing costs are about $6,000, so you'll receive a lump sum payment of $44,000.

With an FHA cash-out refinance, the FHA will back your new mortgage. That means your mortgage will likely come with lower interest rates, and you can be approved with a lower credit score.

To be eligible for an FHA cash-out refinance, you'll need a minimum credit score of 600 to 620 (lenders typically like to see a higher credit score than the minimum), a debt-to-income ratio of no more than 43% (in some cases up to 50% is acceptable), and sufficient income stream to cover your monthly mortgage payments and other debt.

FHA to conventional loan conversion

When you do an FHA mortgage to conventional loan conversion, you can get a canceled mortgage insurance premium (MIP), reduce your mortgage insurance costs, or lower your interest rates. However, note there will be closing costs. Plus, as you're essentially taking out a new mortgage, you'll need to repeat the application process.

The requirements typically include a credit score of at least 620, a debt-to-income ratio (DTI) that doesn't exceed 50%, and proof of income. You'll also need to verify your homeowners insurance and have your home professionally appraised to determine its value.

Pros of refinancing from an FHA to a conventional loan

Refinancing from an FHA to a conventional loan has its pluses and minuses. First, we'll go over the potential benefits. Here’s how it can help you save.

• Canceled mortgage insurance premium (MIP): When you get an FHA loan, you're on the hook financially for FHA MIP — no matter how much money you put down. 

There are two payments: an upfront MIP that you pay at closing and an annual payment. The annual payment gets broken down and tacked on to your monthly mortgage payment. If your down payment was at least 10%, you’ll pay the MIP for 11 years. 

But if your down payment falls below the 10% mark, you'll pay MIP for the life of the loan. Here's the thing: refinancing an FHA loan into a conventional way is the only way to cancel MIP.  

• Reduce mortgage insurance costs: When you refinance an FHA loan into a conventional loan, you might find that you have mortgage insurance because of the equity in your home. Refinancing not only can get rid of your MIP, but it can also lower your monthly payments enough to account for the private mortgage insurance (PMI) you might have to pay.
• Lower interest rates: When you refinance your home loan, you'll get a new interest rate. While conventional loan interest rates are typically a tad higher than FHA rates, you could still get a lower interest rate and save money. That can happen when current refinance rates are lower than when you first took out the loan. And a lower interest rate could potentially save you thousands of dollars.

Cons of refinancing from an FHA to a conventional loan

While a mortgage refinance can affect your finances in a positive way, you should know that it also requires spending some money and time. Let's look at some of the potential downsides of going this route:

• Closing costs: While a refinance from FHA to conventional can save you money by dropping your insurance or by getting a lower interest rate, you’ll have to pay closing costs.

On average, closing costs are about 2% – 6% of the loan balance. For example, let's say your loan balance is $250,000. In this case, you can expect your closing costs to be around $5,000 – $15,000. Since there are costs linked to refinancing, you’ll want to ask yourself, "Are the costs involved worth the potential savings?"

To make sure refinancing is worth it, calculate your break-even point. This is the point at which your refinance makes sense financially, saving you money rather than costing you more than you’ll save.

• Repeat loan approval process: Another way a refinance can cost you is in time. You may already have a home loan, but you’ll need to go through the application and loan approval process all over again for your new loan. This includes having your credit pulled, submitting certain documents and potentially getting another home appraisal. You'll likely need to additionally provide: 

• Recent pay stubs
• A copy of your homeowners insurance policy
• W-2s, tax returns, 1099s
• A new lender’s title insurance policy

How to refinance your FHA loan to a conventional mortgage

Looking to refinance an FHA loan? The exact process can vary depending on the terms of your current loan and your mortgage lender.

Step 1. Research rates and prepare documentation

Before you switch from an FHA loan to a conventional one, you'll need to do your homework. Look at different lenders and compare their rates. Ask about their fees for refinancing.

You may also want to research different types of refinancing. A cash-out refinance, for example, will allow you to borrow from your equity by taking out more than what you owe on your current mortgage in cash. A rate-and-term refinance is focused more on adjusting your interest rate or loan term — or both — without borrowing additional funds.

Whatever the case may be, take the time to gather up important papers, like your pay stubs, tax forms and bank statements, to show the loan officer that you've been responsible with your existing loan.

Step 2. Meet refinancing requirements

Before you start thinking about refinancing from an FHA to a conventional mortgage, you'll want to know what your lender might require.

It can vary depending on the lender and your personal situation, but in general, here’s what you need in order to refinance to a conventional mortgage based on Rocket Mortgage^® requirements:

• 620 minimum credit score
• 50% maximum debt-to-income ratio (DTI)
• Proof of income
• Homeowners insurance verification
• Appraisal of the home or the equivalent of one to determine your home value

Step 3. Submit an application and go through underwriting

Once you've checked off the boxes for basic eligibility qualifications and submitted the necessary documentation, you'll go through the underwriting process. At this stage, the loan officer will complete a thorough evaluation of your financial status and the property being refinanced.

On top of the personal requirements (credit score, proof of income) listed above, a home appraisal is necessary to make sure your home’s value syncs up with your refinancing goals. Your loan officer will likely also complete a title review to check for any issues that might delay the process.

You might also receive a Closing Disclosure, which outlines the final terms and costs of the mortgage refinance. This includes other expenses, such as the loan amount, interest rate, and closing costs.

Step 4. Finish the closing process
Last but not least, you'll complete the refi closing, just as you did when you took out your original mortgage loan. You will need to review and sign sundry loan documents and other relevant paperwork related specifically to the new conventional loan.

FAQs for refinancing from an fha to a conventional loan

Do you still have questions about refinancing from an FHA to a conventional loan? Here are some answers to the most frequently asked questions on topic.

Can I refinance out of an FHA loan?

Yes, you can refinance out of an FHA loan. To qualify for a conventional loan, you'll need a credit score of 620 or higher and have anywhere between 5% – 25% equity in your home. So if you have 20% equity, you might also be able to cancel your mortgage insurance and lower your monthly payment in the process.

When should I refinance my FHA loan to a conventional loan?

Refinancing to a conventional loan can be a good idea if your credit score has improved, interest rates are down, or you plan to live in the house long enough to recoup your closing costs. Otherwise, you may not see some of the benefits discussed above.

Can you refinance an FHA loan to get rid of PMI?

Yes, one of the potential benefits of refinancing an FHA loan to a conventional loan is to get the private mortgage insurance canceled. Once you have at least 20% equity in your home, the PMI can be removed.

The bottom line on FHA refinancing to conventional loans

Refinancing your FHA loan to a conventional loan is entirely possible and features a handful of benefits, such as dropping your mortgage insurance, lowering your interest rate and putting money back into your pocket.

While these perks can help you reach your financial goals, you’ll also need to consider the potential downsides, such as closing costs. So make sure it’s worth it in the long run.

Get a better look at your refinancing options and start your initial mortgage approval process today with Rocket Mortgage.